Post-Brexit Positioning, BOJ to Suggest Stimulus | Weekly Review and Preview

  • Tuesday, July 5, 2016

Welcome to the Signal’s “Weekly Review and Preview.” Each week, we analyze the most important communications from the previous week and give our thoughts on upcoming releases.

  • Review

Federal Reserve
In brief: Speakers elaborated on committee’s thinking
Analysis: Last week, Powell and Mester gave fairly neutral speeches (scoring 0.00 and -0.04 respectively), but their residual scores reveal a more complex narrative. Asserting the importance of looking past Brexit, Powell’s speech scored slightly more hawkish than usual at 0.66 (residual) while still falling in line with recent comments from other Fed officials. Mester provided an opposing narrative, scoring dovish (residual -0.65) as she contended that market insecurity should delay a rate hike. Bullard’s speech may have been the most telling. According to him, the medium to long-run effects of this insecurity should inform the Fed’s reaction function. As Bullard’s dots suggest, this hints at few, if any, rate hikes in the near term.

FRCResidualTrendJuly5

European Central Bank
In brief: Speakers addressed various economic issues
Analysis: Monetary policy was not the top priority of last week’s speakers. Mersch scored neutral (score 0.26, residual 0.00) in his assessment of the EU’s value, while Praet discussed the effectiveness of the ECB’s monetary policy measures in the context of current conditions (score 0.49, residual 0.22). In the most important speech of the week, Draghi discussed the importance of the ECB and the economic–as well as the political–implications of Brexit, scoring just hawkish enough (score 0.62, residual 0.54) to bolster confidence in the ECB while acknowledging the impact of Brexit.

Bank of England
In brief: Stimulus could be around the corner
Analysis: When it comes to last week’s speeches, Mark Carney stole the show. Despite a struggling pound, Carney advocated stimulus due to post-Brexit uncertainty.

Reserve Bank of India
In brief: Score reflects a conflicted board
Analysis: The Reserve Bank of India’s minutes scored slightly dovish in absolute terms (-0.41), but slightly hawkish relative to the average minutes (residual 0.19). Our break down: the scores suggest that the Indian economy is struggling because of global and domestic issues but the risks posed by rising headline inflation are delaying a cut.

Banks of Taiwan, Mexico, and Israel
In brief: Three meetings, two policy moves
Analysis: Taiwan and Mexico–the two policy movers last week–took different paths. Due to concerns about slowing international growth and weak labor market conditions, Taiwan cut rates by a conservative 12.5bps. Mexico raised theirs by 50bps. Israel also had a rate meeting…but held rates. Why? Brexit shock.

Reserve Bank of Australia
In brief: Held rates
Analysis: Despite the market turmoil over Brexit, the Reserve Bank of Australia held rates and will continue to follow how the May cut plays out.

  • Preview

Federal Reserve
Forecast: Minutes to reflect pre-Brexit game plan
Analysis: June’s minutes will likely reflect the world before the Brexit vote. We seriously doubt it will represent current sentiment.

European Central Bank/Bank of England
Forecast: Radio silence
Analysis: With only minor remarks planned, ECB and BOE officials are scheduled to remain relatively quiet this week.

Bank of Japan
Forecast: Kuroda likely to make waves with stimulus announcement
Analysis: The most important speaker of the week, Kuroda will likely signal imminent stimulus, given steadily declining BOJ sentiment and the enormous rise of the Yen on the heels of Brexit.

BOJJuly5_2months

Swedish Riksbank
Forecast: Likely to hold rates
Analysis: Riksbank sentiment has recently risen–suggesting a rate cut is unlikely–but conditions do not yet appear to warrant a hike…especially given recent market uncertainty.

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